JDSU: Raymond James Says Hold on Threat Customers Build Their Own

By Tiernan Ray

Shares of fiber optic components vendor JDS Uniphase (JDSU) are down 34 cents, or 2.8%, at $12.03 after Raymond James’s Simon Leopold this morning cut his rating on the shares to Market Perform from Outperform, and stripped away his $11.50 price target, writing that there is “elevated risk of vertical integration among its customers, especially in the above-average margin [reconfigurable optical add/drop multiplexer] ROADM products,” which would presumable disintermediate the company as a supplier.

Leopold thinks telco vendor Huawei has already sourced some of its own components, which has caused trouble for JDS competitor Finisar (FNSR), which he also rates Market Perform, and he lays out the risks to JDS:

We recently lowered our rating on the shares of Finisar partly on checks that Huawei is close to releasing an internally developed ROADM (an optical switching component) solution. Recent checks suggest that one of JDSU’s largest ROADM customers is also moving to a vertically integrated solution as soon as early 2013 that could potentially result in a $4-6 million per quarter revenue shortfall with a disproportionate effect on gross margin. Although JDSU’s next generation TrueFlex ROADM gains traction in the marketplace (checks indicate that the Twin 1×20 WSS component, part of JDSU’s flexible grid ROADM portfolio, moves from beta to commercial shipments at a major North American customer in early 2013), it likely cannibalizes the legacy product line given that JDSU already holds 60% of the ROADM market, according to our estimates, and further market share gains are unsustainable, in our opinion.

Note that Finisar yesterday afternoon reported fiscal Q2 revenue roughly in line with expectations and beat by a penny on the bottom line and forecast this quarter’s results roughly in line with consensus. Finisar shares today are up 49 cents, or almost 4%, at $13.84.

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DECEMBER 6, 2012 12:12 P.M.

Rich Walkup wrote:

I disagree with this analysis. To vertically integrate this level of technology takes years to establish and the cost to manage the utilization metrics within a vertical process of this type is near impossible.. Three points to understand. One: Capital equipment to build such devices are expensive. Two: training of skilled personal extensive and very expensive, no matter where in the world the factory . three: Predicting factory utilization and capacity planning for this type of process are extreme and unpredictable. The only solution is to outsource to a JDSU or Finisar. They service hundreds of customers and can fill gaps where the verticals cannot.

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Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.